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Valuation Commentary - Dec. '07
Happy Holidays! + A Few Recommendations
by Alex Levin
Happy Holidays, dear friends, clients, and supporters! Like me, you probably prefer to read an article on a single topic that is presented simply and systematically. This month, however, I feel it is important to reflect on a few different topics. For those who use or plan to use the AD&Co. valuation and interest rate modeling products, the following discussions should be of interest:
SATO Tuning for TBAs
More on Interest Rate Model Selection
Practical Monte-Carlo Recipes
In the July 2006 Pipeline article I advocated the use of a lower SATO tuning (0.33) for fixed rate TBAs. This tuning reflected the general trend which started in 2002 and lasted throughout 2006: SATO was becoming less of a factor for agency pools. Alt-A borrowers had no trouble getting a mortgage or to improve it quickly by flowing into one of the many products offered by originators. One can’t claim this anymore: due to the ongoing mortgage crisis, refinancibility has shifted down. Furthermore, since July of 2006, the age assumption for 6.5s and 7.0s (the ones we view as gauges of the refinancing risk) have extended from 4-5 to 9 months.
As a result, we found it reasonable to raise the SATO tuning significantly. To simplify, we will be using the SATO tuning of 1.0. Below we plot OAS graphs against a collection of dealers and their averages, as of October 5 of 2005; median WAC and WAM were employed for the AD&Co. results.
